Roads to Prosperity or Bridges to Nowhere? Theory and Evidence on the Impact of Public Infrastructure Investment
Chapter in NBER book NBER Macroeconomics Annual 2012, Volume 27 (2013), Daron Acemoglu, Jonathan Parker, and Michael Woodford, editors (p. 89 - 142)
We examine the dynamic macroeconomic effects of public infrastructure investment both theoretically and empirically, using a novel data set we compiled on various highway spending measures. Relying on the institutional design of federal grant distributions among states, we construct a measure of government highway spending shocks that captures revisions in expectations about future government investment. We find that shocks to federal highway funding positively affect local GDP both on impact and after six to eight years. However, we find no permanent effect (as of ten years after the shock). Similar impulse responses are found in a number of other macroeconomic variables. Our results suggest that the transmission channel for these responses operates through initial funding leading to building, over several years, of public highway capital, which then temporarily boosts private sector productivity and local demand. To help interpret these findings, we develop an open economy New Keynesian model with productive public capital in which regions are part of a monetary and fiscal union. We show that our empirical responses are qualitatively consistent with an initial effect due to nominal rigidities and a subsequent medium-term productivity effect that arises once the public capital is put in place and available for production.
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A data appendix is available at http://www.nber.org/data-appendix/c12750/appendices.pdf
This paper was revised on August 14, 2012
Document Object Identifier (DOI): 10.1086/669173This chapter first appeared as NBER working paper w18042, Roads to Prosperity or Bridges to Nowhere? Theory and Evidence on the Impact of Public Infrastructure Investment, Sylvain Leduc, Daniel Wilson
Commentary on this chapter:
Comment, Francesco Giavazzi
Comment, Valerie Ramey
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